Revenue $30,500,000,000 $20,300,000,000 $7,000,000 $60,800,000,000 $22,600,000,000 $985,000,000 Gross Margin 70% 65% 72% 45% 68% 60% Operating Margin 50% 55% 52% 38% 58% 30% Net margin 30% 28% 32% 24%...

Revenue	$30,500,000,000	$20,300,000,000	$7,000,000	$60,800,000,000	$22,600,000,000	$985,000,000
Gross Margin	70%	65%	72%	45%	68%	60%
Operating Margin	50%	55%	52%	38%	58%	30%
Net margin	30%	28%	32%	24%	35%	2%
Earnings	$9,150,000,000	$5,684,000,000	$2,240,000	$14,592,000,000	$7,910,000,000	$19,700,000
Debt/Equity	0.05	0.60	0.08	0.00	0.35	2.00
Market Cap	$164,700,000,000	$130,732,000,000	$44,800,000	$233,472,000,000	$189,840,000,000	$197,000,000
P/E	18	23	20	16	24	10
Industry life cycle stage	Late maturity	Growth	Early maturity	early maturity	growth	early growth
Strategic fits	--	none	supply chain	manufacturing	distribution, marketing	marketing, sales
Forecast annual growth for next five years	3%	17%	11%	8%	15%	45%

SmithCo just completed its most profitable year in its history, yet faces a strategic crisis.


SmithCo is the leader of a dying industry, projected to grow only at about 3% annually for the next five years. SmithCo has been brilliantly managed for the short and medium term, but top management has failed to plan for the end of life transition for the industry.


Now it is apparent that SmithCo has to act, and fast. The good news is that SmithCo has plenty of free cash flow to fund a transition strategy, and can expect profit margins to hold up on its current business for most of the coming five year period. After that point, however, SmithCo’s current business is expected to decline at a rate of approximately 20% annually.


A number of interesting acquisition targets are being explored. Your have been asked to help evaluate the candidates for acquisition. Please review the data above and prepare your observations and suggestions regarding SmithCo diversification. What is the case for and against each candidate?


STRATEGIC GROUP


2. Evaluate the following industry data and answer the following questions:


- Which strategic group has the largest market share?


- Which strategic group has the highest rate of growth?


- What is the net margin of each strategic group (most recent year)?


- What is the net margin of the industry (most recent year)?

$ Millions
Company	Strategic Group	2007 Revenue	2007 Net Profit	2006 Revenue	2006 Net Profit
Aardvark	A	150	6	120	6
Beaver	B	13	2	10	1
Cheetah	C	11	0.75	7	1
Dingo	C	9	1.25	3	0.9
Ewok	B	17	3	10	2
Fox	A	70	2	80	3.5
270	15	230	14.4

3.
DUPONT RATIOS

Fribble has asset turns of 2.5, asset/equity leverage of 2, and an ROE of 5.0%. What is Fribble's return on sales percentage?
Kibble has a return on sales of 10%, asset turns of 2, and leverage of 1. What is Kibble's return on equity?
Imagine two companies with the same ROE. One is a differentiator; one is a cost leader. Describe how their DuPont chains would be different and explain the reasons why. Construct a simple example to illustrate.

BALANCE SHEET

4. What action would have a positive effect on ROE?
- Stock buyback
- Bond payoff
What actions would have a negative effect on ROE?
- Issuing stock
- Paying off debt
- Buying back stock
- Issuing bonds
How would borrowing money affect the asset turns ratio?
How would borrowing money affect the return on sales ratio?
How would borrowing money affect the leverage ratio?
How would selling stock affect the asset turns ratio?
How would selling stock affect the return on sales ratio?
How would selling stock affect the leverage ratio?
5.
INCOME STATEMENT

Amounts in $M	Fribble	Kibble
Revenue	100	120
COGS	62	63.6
Gross Income	38	56.4
SG&A	21	36
Operating Income	17	20.4
Tax	5.95	7.14
Net Income	11.05	13.26

Which company is more profitable?
Based on the data in the income statement, if you had to characterize the generic business strategy of each company, what would you say?

6. Be sure that you understand:

• 
  Factors that affect fixed and variable costs
  


• 
  Cost-volume-profit interactions
  


• 
  How to calculate contribution margin
  


• 
  The factors that affect contribution margin